Arc of the Covenant: Does a Foreclosure on a Deed of Trust Extinguish Later Recorded Covenants?
The Mississippi Supreme Court addressed this question in Loblolly Properties LLC v. Le Papillion Homeowner’s Associations Inc., (Miss. 2023). In Loblolly, Chattel Group (“Chattel”), the original owner of the lots in question (referred to as the “Le Papillon Development”), executed a Deed of Trust to First State Bank. Id. at *1. After the execution of the Deed of Trust, Chattel filed a Declaration of Covenants, Conditions and Restrictions that governed the Le Papillon Development. Id. The pertinent part of the declaration provided that non-payment of homeowners association (HOA) fees would result in a lien on the property. Id. Chattel Group defaulted on the terms of the Deed of Trust, and the Deed of Trust’s trustee conducted a nonjudicial foreclosure and conveyed the lots to First State Bank. Id. Thereafter, Loblolly purchased the lots from First State Bank through a Special Warranty Deed, which provided that the purchase was “subject to any and all Covenants and Restrictions of record.” Id.
Loblolly attempted to pay the HOA fees; however, Loblolly’s payment was rescinded because they did not pay the full amount. Id. Subsequently, Loblolly’s attorney contacted Le Papillion, the managing company of the HOA, and informed them that Loblolly would not be paying the HOA fees because the covenant requiring payment was extinguished when the foreclosure on the Deed of Trust occurred. Id. Loblolly then filed a complaint against Le Papillon requesting that the Chancery Court declare that Loblolly was not subject to the covenants and restrictions that were filed after the Deed of Trust. Id. at *2. The Chancery Court denied Loblolly’s request holding that “even though the covenants may have been extinguished by the foreclosure, the covenants applied” through the language of Special Warranty Deed. Id. Further, the Chancery Court granted summary judgement in favor of Le Papillon for the same reasons. Id. Loblolly subsequently appealed. Id.
The Court of Appeals affirmed the Chancery Court. Id. The Court of Appeals majority opinion mainly relied on the language of the Special Warranty Deed reasoning that Loblolly should have been on notice of the later-filed covenants and such notice was sufficient to hold Loblolly responsible for complying with the covenants. Id. The Court of Appeals majority opinion cited Alexander v. Wardlow, 910 So. 2d 1141 (Miss. Ct. App. 2005), which held that a tax sale did not extinguish covenants that increased the purchaser’s land value. Loblolly at *3. Applying that reasoning to the present case, the Court of Appeals majority found that the covenants that encumbered the lots prior to the foreclosure continued thereafter because they benefitted and increased the value of the subject lots. Id. On the other hand, the Court of Appeals dissenting opinion reasoned that the Deed of Trust was a senior interest, and the later-recorded covenants were junior interests. Id. Applying general foreclosure principles, the Court of Appeals dissenting opinion would have found that the foreclosure of the Deed of Trust wiped out the junior interests—the later-recorded covenants. Id.
The Mississippi Supreme Court’s majority opinion (the “Majority”) ultimately agreed with the Court of Appeals decision; however, the Majority focused on notice and evaluated the nature of homeowners associations. Id. The Majority reasoned that an HOA is an organization that has unique characteristics, such as mandatory membership. Id. at *4. Moreover, the Majority found that Loblolly had sufficient notice that the lots at issue were subject to the later-recorded covenants, including the covenant to pay HOA dues. Id. In agreement with the Court of Appeals, the Majority found that the foreclosure on the Deed of Trust did not terminate the later-recorded covenants and that Loblolly was on sufficient notice of the covenants when they purchased the lots subject to any and all covenants and restrictions. Id. The Majority affirmed the Court of Appeals decision stating that “it is consistent with the state’s case law concerning notice and the purpose of HOAs and their covenants.” Id.
The Supreme Court’s dissenting (the “Dissent”) opinion would have reversed the Court of Appeals decision and found that the covenants were extinguished upon the foreclosure of the Deed of Trust. Id. at *5. Similar to the Court of Appeals dissenting opinion, the Dissent reasoned that as a senior interest, the foreclosure on the Deed of Trust extinguished all junior interests which included the later-recorded covenants. Id. Moreover, the Dissent, in further agreement with the Court of Appeal’s dissent, stated that the Special Warranty Deed in which Loblolly agreed to take the lots subject to any and all covenants could not revive the covenants that had been extinguished upon the foreclosure of the Deed of Trust. Id. In conclusion, the Dissent stated that an evaluation of notice is not necessary because the foreclosure wiped out the covenants in question. Id.
